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Creditor Protection and the Dynamics of the Distribution in Oligarchic Societies

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  • Manuel Oechslin

Abstract

This paper introduces credit market imperfections and barriers to entrepreneurship into the Ramsey growth model. It is assumed that only a small elite, the oligarchs, may run firms and that these oligarchs � when borrowing from workers � may renege on the debt contracts at low cost. In such an economy, poor contract enforcement slows down the transition towards the steady state and alters the dynamics of the distribution strongly in favour of the oligarchs. The reason is that the workers are forced to charge �low� borrowing rates in order to decrease the incumbents� incentives to default. With dynastic preferences, low returns reduce the workers� propensity to save; they discount future wages less and consume more out of current income. Calibrations of the model suggest that the elite�s welfare gains are large � even if the oligarchic structure were associated with substantially lower productivity growth rates. These findings point to political forces behind low financial development.

Suggested Citation

  • Manuel Oechslin, 2006. "Creditor Protection and the Dynamics of the Distribution in Oligarchic Societies," IEW - Working Papers 264, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:264
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    Cited by:

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    2. Kim, Dong-Hyeon & Lin, Shu-Chin, 2011. "Nonlinearity in the financial developmentâincome inequality nexus," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 310-325, September.
    3. Hsieh, Joyce & Chen, Ting-Cih & Lin, Shu-Chin, 2019. "Financial structure, bank competition and income inequality," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 450-466.
    4. Sanfilippo-Azofra, Sergio & Torre-Olmo, Begoña & Cantero-Saiz, María & López-Gutiérrez, Carlos, 2018. "Financial development and the bank lending channel in developing countries," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 215-234.
    5. Kebede, Jeleta & Selvanathan, Saroja & Naranpanawa, Athula, 2021. "Foreign bank presence, institutional quality, and financial inclusion: Evidence from Africa," Economic Modelling, Elsevier, vol. 102(C).

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    More about this item

    Keywords

    creditor rights; asset distribution; economic development;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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